As people emerge from lockdowns and start going back to work and taking vacations again, some new duds are in order. Spending on apparel is already showing signs of making a comeback. The U.S. Census Bureau reported a precipitous 26% drop in average apparel and accessory store sales in 2020, but the rate only fell a respective 10% and 11% year over year in January and February 2021 — implying households are closing back in on pre-pandemic clothes spending.
There could be plenty of pent-up demand waiting in the wings for fashion and lifestyle retailers later this year. To that end, Farfetch (NYSE:FTCH), lululemon athletica (NASDAQ:LULU), and Stich Fix (NASDAQ:SFIX) look like great buys in April to bet on a rebound in this beaten-down segment of the economy.
Digital fashion, rebounding fashion
Farfetch’s online marketplace for high-end goods was a winner in 2020. The luxury industry has long relied on physical stores (it’s nice to touch and feel something you’re about to drop some serious coin on), but that got a lot harder to do when COVID-19 struck and shuttered many brick-and-mortar stores around the globe. Farfetch was waiting in the wings, though, and its revenue surged 64% to $1.67 billion last year. Total value of merchandise sold on its platform grew 49% to $3.19 billion.
But Farfetch is more than a one-off play on luxury e-commerce. Besides its own marketplace for clothing and accessories, the company is a trusted partner that helps other luxury brands build a web presence, manage inventory, ship products, and coordinate in-store pickup of products. Despite the surge in sales Farfetch reported, the luxury industry actually took a big hit last year. Global spending was down an estimated 20% to 30% to about $220 billion, but sales are expected to jump back to $285 billion or so this year. As posh retail brands pick up steam again, Farfetch will continue to win as their partner on a “seamless omnichannel shopping experience.”
Annual spending on high-end goods is expected to reach $400 billion by 2025. The lion’s share of this growth will come from the fast-developing middle class in mainland China, and Farfetch recently inked a joint venture deal with Alibaba (NYSE:BABA) to cash in on this massive market. Some optimistic analysis suggests Farfetch’s active user base could increase tenfold in the next five years as a result of its partnership with China’s e-commerce giant.
Suffice to say Farfetch has a lot to gain. If it can sustain its growth, shares look downright reasonable at 11 times trailing 12-month sales after the high-flying tech stock sell-off in March (Farfetch shares are down about 25% from all-time highs as of this writing). And after its epic showing in 2020, this growth company has reached breakeven. With lots of profitable expansion in the years ahead, this looks like a fashion stock best buy to me.
A standout clothing leader even during lockdowns
While apparel sales were down sharply in the U.S. last year, Lululemon bucked the trend. The athleticwear-inspired textile brand barely skipped a beat during the widespread economic lockdowns last spring. Lululemon’s sales fell only 17% year over year during its fiscal 2020 first quarter (corresponding to spring 2020) and grew 2% year over year during the second quarter (summer 2020). Talk about a powerful brand. While many of its peers saw sales all but dry up when the novel coronavirus first reared its ugly head, plenty of people were still shopping for yoga pants and other athleisure styles from Lululemon.
The company just released its fiscal 2020 fourth-quarter update, reporting sales of $1.7 billion (up 24% from the same period last year) and full-year sales of $4.4 billion (up 11% from 2019). Given the average apparel company took a 26% revenue tumble, the implications here are quite meaningful: Lululemon is gobbling up market share at the expense of competitors. And as it starts lapping financial results from a year ago, growth rates are poised for dramatic upside in the next couple of quarters.
Given the company’s outlook for revenue of at least $5.55 billion and adjusted earnings per share to increase at least 30% in fiscal 2021, Lululemon stock looks like a timely purchase. Sure, shares trade for a premium 64 times trailing 12-month adjusted earnings, but this company is riding secular tailwinds favoring comfortable athletic-inspired clothing and a young consumer that is mindful of fitness and health. Besides expanding its assortment of ensembles, Lululemon also doubled down on what it does best and purchased home fitness tech start-up Mirror last summer.
The apparel industry isn’t a high-growth one, but Lululemon is a standout brand making waves. With the company having a loyal and growing fan base and adding a shot of fitness tech to its ecosystem, now looks like a good time to buy a proven long-term winning stock.
Wardrobe selection with some AI-infused intuition
Speaking of technology, curated clothes and accessories service Stitch Fix looks like a deal again after its stock took another header. It’s not that Stitch Fix is running out of new consumers that want a new wardrobe shipped to them every month or two. On the contrary, the company is reporting record numbers of new sign-ups as 2021 gets underway. At the end of January, Stitch Fix said its active client base had increased 12% from a year ago to 3.9 million. And much like Lululemon, the pandemic was but a shallow pothole for Stitch Fix as it quickly returned to growth mode after a brief blip last spring.
Nevertheless, shares have been halved from their all-time high reached in February. Some investors got ahead of themselves and ran up Stitch Fix’s price tag ahead of the last earnings report, but the tech stock sell-off in March has brought its valuation back to reality. Management also tempered expectations. Due to shipping and supply constraints, it lowered guidance for revenue growth to 18% to 20% this year (it was 20% to 25% before).
But growth is growth, and the fact this clothier is able to grow at all in this retail environment reinforces that it might be on to something. Stitch Fix uses machine learning to best match clothes to its clients — and improve the selection process over time. It also applies the same algorithms in its supply chain to capitalize on consumer trends and stay stocked up on items in highest demand. And for a more traditional online shopping experience, Stitch Fix is testing its “buy now” feature that allows customers to browse and select attire on their own.
After the recent stumble, Stitch Fix trades for less than 3 times trailing 12-month sales. And while the bottom line is of lesser concern right now as this up-and-coming name in apparel spends to maximize growth, it does operate close to positive free cash flow territory and had $307 million in cash and equivalents in the bank at the end of January. Shares are a long-term value again for this AI-enhanced fashion company.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.